Ladies and gentlemen, good day, and welcome to the Alamo Group Inc. Second Quarter 2022 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Edward Rizzuti, Executive Vice President, General Counsel and Secretary. Please go ahead.

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact us at (212) 827-3746, and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (888) 203-1112 with the passcode 4806226. Additionally, the call is being webcast on the company's website at www.alamo-group.com, and a replay will be available for 60 days. On the line with me today are Jeff Leonard, President and Chief Executive Officer; Richard Wehrle, Executive Vice President, Chief Financial Officer and Treasurer; and Dan Malone, Executive Vice President and Chief Sustainability Officer. Management will make some opening comments, and then we'll open up the line for your questions. During the call today, management may reference certain non-GAAP numbers in their remarks. Reconciliations of these non-GAAP results to applicable GAAP numbers are included in the attachments to our earnings release. Before turning the call over to Jeff, I'd like to make a few comments about forward-looking statements. We will be making forward-looking statements today that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the company's actual results and future periods to differ materially from forecasted results. Among those factors which could cause actual results to differ materially are the following: market demand; COVID-19 impacts, including operational and supply chain disruptions; competition; weather; seasonality; currency-related issues; geopolitical issues; and other risk factors listed from time to time in the company's SEC reports. The company does not undertake any obligation to update the information contained herein, which speaks only as of this date. I would now like to introduce Jeff Leonard. Jeff, please go ahead.

Thank you, Ed. We want to thank all of you for joining us today on the call. Richard will begin our call with a review of our financial results for the second quarter of 2022. I will then provide more comments on the results. Following our formal remarks, we look forward to taking your questions. Richard, please go ahead.

Thanks, Jeff. Good afternoon, everyone. Alamo Group's second quarter 2022 closed with an impressive performance with record results for the quarter, driven by a strong demand for our products and a continued challenging operating environment. Second quarter consolidated net sales for 2022 were $396 million, an increase of 14% compared to $348 million in the second quarter of last year. Sales were negatively impacted almost 2.5% due to currency translation as the U.S. dollar strengthened against the currencies of international countries where we operate. Gross margin dollars in the quarter improved compared to the second quarter of 2021 by just over $11 million, with gross margin percentage down by only 20 basis points. Both margin dollars and percentage were negatively affected by freight costs on inbound freight inventory -- on inbound inventory as tariffs and surcharges continue to be added to already significantly higher freight invoices. Consolidated net income for the second quarter of 2022 was just over $28 million or $2.39 per diluted share, an increase of 9% versus net income of $26 million or $2.19 per diluted share for the second quarter of 2021. Solid control of cost and expenses helped support the increase in profitability, included in the 2021 second quarter results was a onetime gain on the sale of a facility in the Netherlands of $3.4 million. Excluding this gain, net income for the second quarter of 2021 was $23 million or $1.97 per share. Vegetation Management division had an exceptional second quarter for 2022 as markets were extremely strong. Second quarter 2022 net sales were $255 million, an increase of 19% compared to $215 million for the second quarter of 2021. The division continues to see strong demand for forestry and tree care and agricultural and governmental mowing products in both North America and Europe.…

Thank you, Richard. First, I'd like to again thank everyone who's joined us on the call this afternoon. During the second quarter, activity in our major markets remained strong, orders received during the quarter remained at a very good level, but declined approximately 7% compared to the second quarter of 2021, partly due to exchange rate effects. Our order backlog remains excellent with healthy margins, and this provides a very solid foundation for the company's performance in the remaining months of this year and into 2023. The second quarter continued the pattern over the past several quarters as persistent headwinds in our operating environment constrained our results. These included persistent material and wage cost inflation, elevated transportation costs, supply chain disruptions and related component shortages and sporadic impacts on our workforce of yet another variant of COVID. Having said that, I'm pleased to report that during the final weeks of the quarter, we began to see modest improvement in some areas of our supply chain that helped improve the efficiency of our manufacturing operations and increased shipments beyond our previous expectations. Our Vegetation Management division had an excellent quarter in all respects. The noted improvement in supply chain performance, helped the division increase sales by nearly 19% and increased its operating income nearly 45% compared to the second quarter of 2021. Sales in the division's North and South American operations were up sharply, while its European sales were stable, albeit at a very high level. European sales increased in local currency. Better pricing, improved supply chain performance and higher manufacturing efficiencies sustained the division's gross margin despite ongoing material and labor cost inflation. The division's teams did an excellent job controlling expenses during the quarter, and that further improved the results. The Vegetation Management division's order bookings declined by 26%…

[Operator Instructions] We will begin with Chris Moore with CJS Securities.

Start on the vegetation side. So it sounds like dealer inventories are rising a bit, not where they were at the pandemic. Order flow was slower. Is that -- does that signal that we're kind of near the peak on vegetation? Or how do you look at that at this stage?

Okay. Great question, Chris. First of all, my remark about that was confined to ag, specifically. Vegetation Management remains strong. And although their orders were a little softer this quarter too, they had an exceptional first quarter. And actually, I think lead times tended to pull those orders forward a bit. And we're actually making the call today from our Morbark facility up in Wynn, Michigan. We've been with the management team all day, and it's a very bullish environment and attitude here at the moment. So our Forestry and Tree Care business looks really good. And on the ag side, to answer your question a little bit more specifically, the ag business is a cycle. What I'm looking at is things like the AEM tractor report, which shows the tractors under 100-horsepower down about 14% compared to last year, and that's the segment where we serve. So while other large ag OEMs are talking about fairly bullish conditions in ag, remember, they make the most money on the big iron, the big tractors, which is not our market segment. So I meant what I said. If you look at the crop prices and farm incomes, they're still pretty good, but farmer sentiment has been falling now for a couple of quarters that may just be emotional. But obviously, it's one key indicator we pay attention to. So I hope that's clear.

One other point there. This is Richard. For -- 2021 wasn't a good barometer of orders because I think you had a lot of pent-up and demand there. When we look at those orders in the ag space that Jeff is referring to, if you compare those back to 2019, they're still ahead of that pace.

And one last comment I'd like to make about that. If you look specifically at our Bush Hog business and our Rhino business, our mower business is in North America. They had an exceptional quarter, several quarters in a row, and a lot of that equipment hasn't yet been delivered to our dealers. So our dealers are hesitant to keep placing orders, particularly those that are sophisticated and realized that steel prices are falling. So rather than keep placing orders now, they're waiting for, I think, a little better conditions in the market, steel prices to come down and our surcharges to come down. And then I think ordering will return to a very, very normal level. So I'm not really that concerned. There's a couple of things in the key indicators to pay attention to. But so long as crop prices remain healthy and farm incomes are good, I think those are the main drivers of the market.

Got it. Very helpful. Maybe just in terms of kind of where we are from a margin perspective. Obviously, lots of room for improvement on the industrial side. It sounds like you think the second half of the year will be better than the first. The 12.9% vegetation margin, is that as good as it gets? Or is there room for expansion at some point there? How do you look at that?

I think there's going to be some room for expansion there, Chris, if you recall for Q3, that's a big quarter for us in part sales. So we'll have some margin pick up mainly from that. I think the other thing we're hoping for is that some of these costs, as Jeff had mentioned, raw material prices or costs have come down. But the component pieces that are being used for our attachments in there that require steel have not dropped. So you're still going to have some of that issue there. And I think we're a little bit still concerned and keeping an eye on inbound freight charges that we're receiving, so.

And -- no that helps. And --

I believe it --

Got it. And the vegetation -- excuse me, on the industrial side, obviously, lots of challenges there, Q2, same kind of conversation there. You're seeing some improvement in kind of sequentially on the industrial side?

Yes. This is Jeff speaking again. If you look at the full details of our P&L, which, of course, we don't publish, you would actually see their pricing margins are higher. The material -- the price to material cost and standard cost is rising, but they're giving it back in the middle of the P&L in terms of manufacturing efficiencies. They've been just extraordinarily disrupted this quarter more so than any quarter through the pandemic from my perspective because of the supply chain. And there -- as I said, their chassis situation actually got a little bit better during the quarter. But now it's all kinds of other things. I mentioned joysticks because that's such a random one. Who would have thought there would be a shortage of joysticks and then things like radiators that are normally very easily accessible, suddenly, there's a shortage on those. So they came out of the gate in the quarter really well. That division had a really good start to the quarter and then just wasn't able to finish because of the supply chain. And we didn't see that coming. On the other hand, I've talked to all the teams over the last couple of days, and they're feeling good about the back half of the year. I think their supply chain picture is going to improve. I'm getting increasingly confident about that. So I like where they sit and where they're positioned for the rest of the year. And then finally, the remark I made about snow removal. Q2 is always the bottom of the trough in our snow removal business and you kind of got to take a deep breath and hold your breath until the quarter ends. But we've had a huge intake of orders from municipal plows during the second quarter. So we're going to have a really good winter season, particularly in Q4 and Q1 of 2023. So I feel very positive about where that division is headed and I expect that they'll get back on step pretty quickly.

Got it. And very helpful. Last one for me. Just you talked about at the end of Q1, sequential growth in Q2 and at least into Q3. Given the kind of the very strong Q2 revenue, is it reasonable to think Q3 revenue is down a little sequentially? Or how are you looking at that now?

I think my personal guess is that Q3 is going to look a lot like Q2. That's how I feel about it. But the supply chain can always surprise us, Chris. I mean that's a day-by-day game. But given where we stand now with chassis deliveries improving, and we are seeing some encouraging news on chassis now for the first time in several quarters. I mean, genuine improvements in volumes, which we've not seen for a while. If we can get some of these other commodities sorted out, we've got a couple of quarters of good running. And I think that's consistent with the conversation you and I had at the end of the first quarter where I told you, if we got a little bit of relief in the supply chain, this company would be in for 2 to 3 quarters of really nice running. And I still feel that way.

Now moving to our next question, and that will come from Mike Shlisky with D.A. Davidson.

I wanted to maybe -- I wanted to maybe ask first about -- if I missed this, I'm sorry, the sales and backlog growth, can you give any sense as to how much of the growth year-over-year was due to pricing?

I think in the Industrial division, most, they're up year-over-year. They're up, I think, 9% if I've got my number right in my head. And obviously, Mike, when you look at that division, I would say the majority of that is priced, probably 2/3 is priced to take a guess. When you look at Vegetation Management, it's a very different story there. It's probably half and half organic growth [and] price, just to give you a rough idea.

Great. I wanted to follow up on some of your comments you made throughout this call about chassis supply as well. You've made some internal efforts on chassis supply both with trying to find new suppliers and other sources. Can you give us some kind of feel for how much do you think it's the efforts of your own team to very recently improved chassis supply and your efforts? Or how much is it just the overall supply chain for the trucks getting better and they're able to just ship better from there.

We've historically had 1 supplier that supplied the, I'll say, the vast chunk, more than 50% of our chassis demands. And that supplier has been struggling a lot. And as I said at the end of the first quarter, we've diversified now. We now have 3 chassis suppliers supplying us to secure our future demands for chassis, Mike. But our core supplier is finally getting back on step. And that you've heard me talk about Daimler and Freightliner a lot and their production situation is starting to improve, and they've assured us now with reasonable certainty that we're going to receive a few more trucks next year than we were originally expecting.

Got it. And then you don't always discuss it too open, Jeff, but could you maybe give us some sense as to how things are going on, the new product development side? Any major divisions have anything big coming out either at the upcoming trade shows or for next winter or next spring?

Yes. We have a bunch of things in the fire. I probably mentioned a quarter or 2 ago, Mike, we started this technology center down in Huntsville to start beginning working in earnest on electrification. We expect to be showing what I've always called near-market-ready prototypes next spring. I think that's the timetable. So you're going to see a burst of things hitting the market next spring.

[Operator Instructions] Moving on to a question from Greg Burns with Sidoti & Company.

In terms of the production constraints, how much idle capacity do you have? And how fast can you turn up production if the supply chain does start to get to normalize?

Well, I can tell you, we had a chunk of underabsorption in the quarter, Greg. So I mean, that's a pretty good indicator. We've got capacity available, particularly in industrial, they got hit pretty hard by underabsorption during Q2. We're in good shape from a manpower point of view, and we still have lots of our operations that are still running only half of a second shift. If you come up here to Morbark to this giant million square foot plant, there's a lot of capacity available up here. So I don't feel we're constrained in any way by our internal capacities at the moment with one caveat. And that would be another wildfire spread of COVID that knocked the workforce out again. We've just had sporadic rounds like everybody has, somebody gets sick and comes in and we've got a department [the next] quarantine for a few days. but we've learned to live with that and manage our way around it. But if there really were another bad outbreak, that would change my outlook a little bit. But I don't feel we're internally constrained at all at the moment.

Greg, this is Richard. I think the other thing to keep in mind is our WIP is probably double what we normally carry. And a lot of that, we're getting so much start and stops. And as Jeff mentioned in his presentation, it's not the chassis, it's the pieces and the components that we need to complete the units. And we've carried way too much in there. We missed several million dollars worth of orders just in the last quarter, we could have had if the supply chain had cooperated.

Okay. Great. And then in terms of some of the federal support programs on the municipal side of the business, particularly like the CARES Act and I think it was like $350 billion of payments being made. Have you seen any benefit from that? Is that showing up in your orders in backlog yet? Or is that still something --

It is starting to show up in our order book, Greg, we had a really good quarter for sweeper bookings this quarter as several of our competitors also reported. Our excavator bookings are in good shape. That's also driven by things like the infrastructure bill. But I would say it's in the early stages. I think we're going to see more than we're seeing right now. I don't think a lot of that money has been spent, frankly, I just don't think anybody has really seen the impact of it yet.

And ladies and gentlemen, this does conclude your question-and-answer session. I'll turn the call back over to management for closing remarks.

Okay. That concludes the call today. We look forward to having you join us on our Q3 conference call when we expect to have more news to report to you. Thank you very much.

With that, ladies and gentlemen, this does conclude your conference for today. Thank you for your participation, and you may now disconnect.